Issues hamper low earners

Monday

Aug 31, 2009 at 2:00 AM

Millions of low-income families rely on check-cashing companies, money orders and payday loans to handle basic financial needs — costly services that can undermine tight household budgets — even as evidence shows many are receptive to buying on layaway and even contributing to retirement savings plans.

TIM GRANT

Millions of low-income families rely on check-cashing companies, money orders and payday loans to handle basic financial needs — costly services that can undermine tight household budgets — even as evidence shows many are receptive to buying on layaway and even contributing to retirement savings plans.

"In a sense, we are living in the richest nation in human history, yet it's stunning that nearly 50 million people are living below a living wage," said Eldar Shafir, a professor of psychology and public affairs at Princeton University who contributed to the book, "Insufficient Funds: Savings, Assets, Credit and Banking Among Low-Income Households."

The book, published by the Russell Sage Foundation in New York, takes a look at the issues that hamper the financial well-being of low-paid workers.

"When people are living a healthy, wealthy life, all of us are better off," said Shafir. "You'll have fewer medical emergencies and higher education. As you reduce the urgency in the plight of the poor, the quality of life for all of us will go up."

The researchers concluded that the high costs of doing business outside the traditional banking system often undermines low-income workers' ability to save, buy a house, improve job skills, send children to college and eventually break the cycle of living hand to mouth.

Researchers found nearly 25 percent of low-income families — those earning less than $18,900 a year — have neither a checking nor savings account. Even among moderate-income households earning between $18,900 and $33,900 a year, nearly 13 percent lack any bank account.

A worker earning minimum wage, working full time and making less than $12,000 a year might pay $250 to $500 a year to cash payroll checks at a check-cashing outlet, in addition to fees for money orders, wire transfers, bill payments and other common transactions.

The reasons that so many do not use the traditional banking system are complex.

In low-income neighborhoods, payday loans and check cashing businesses far outnumber commercial banks. Many low-income people are barred from having bank accounts if they have had past problems with their accounts and are reported to the Chex System, a private clearing house that banks use that is similar to a credit report.

Some low-income earners simply do not trust banks or cannot maintain the minimum balance requirement in a checking account.

Banks sometimes hold checks for several days before crediting the deposit, and that wait may be impractical for low-income customers.